2014 (11) TMI 589 - HC - Income Tax

Court Upholds Tribunal's Valuation Decision on Goodwill, Dismissing Appeal Against Revenue

COMMISSIONER OF INCOME TAX Versus EPHORIC PHARMACEUTICALS ANKLESHWAR PVT. LTD.

The Court upheld the Tribunal's decision regarding the valuation of goodwill at Rs. 1,60,00,000, dismissing the appeal against the revenue. It found the ... Determination of value of goodwill – matter remitted back after the report from DVO - Held that:- The Tribunal rightly noted that the assessee company transferred its Unit II to its 100% subsidiary viz. E.D.O.P. for a consideration of ₹ 4,65,90,306/- out of which ₹ 1,60,00,000/- was claimed as the value of goodwill - expected super profits method of valuation of goodwill is an accepted method - the Registered Valuers of the assessee adopted the method of “expected super profits” which was in consonance with the accepted methods of accountancy and principles of law - The AO rejected the detailed report without any cogent reasons and proceeded to value the goodwill by adopting the method which is contrary to the accepted principles of accountancy and the settled principles of law - the AO Accepted the report of the Registered Valuers in the original order without referring this issue of valuation to the Departmental Valuation Officer and even when the case was restored to him by the CIT u/s. 263, he did not refer the case to the Departmental Valuation Officer and adopted his own method and arrived at erroneous conclusions - the value of goodwill determined by the Registered Valuers viz. M/s. S.I. Mogul & Co., ₹ 1,60,00,000/- being based on accepted method of accountancy and settled principles of law – the order of the Tribunal is upheld – Decided against revenue. Addition on technical know-how deleted – Held that:- The know-how was generated in the course of day to-day business operations of the assessee company. It did not separately pay for acquiring this capital asset – the Tribunal tightly recorded that the technical know how is obviously a capital asset - The price realised on sale of capital asset would be a capital receipt - The only facts certain expenses for calender years 1968 and 1969 of research section had been allowed as deduction - It is not brought on record by the ITO as to what was the nature of those expenses which had been allowed and what amount has been allowed - there was no cost of this asset and it could not be therefore liable to capital gain tax - the goodwill which was assessed by the valuer in scientific method - There was no substitute opinion by any competent officer – the order of the Tribunal is upheld – Decided against revenue. Issues Involved:1. Determination of the value of goodwill.2. Deletion of addition made on account of technical knowhow.Issue-Wise Detailed Analysis:1. Determination of the Value of Goodwill:The first issue revolves around whether the Tribunal was correct in law in holding that the value of goodwill determined by the registered valuers at Rs. 1,60,00,000/- is fair and reasonable, instead of referring the matter back to the Assessing Officer (A.O.) for a departmental valuer's report.- Background: The assessee company transferred its Unit II to its 100% subsidiary for a consideration of Rs. 4,65,90,306/-, of which Rs. 1,60,00,000/- was claimed as the value of goodwill. This valuation was supported by a report from the Registered Valuers M/s. S.I. Mogul & Co., Bombay. Initially, the A.O. accepted this valuation. However, following the directions of the CIT under Section 263, the A.O. reassessed the value of goodwill at Rs. 64,37,000/- without referring the matter to the Departmental Valuation Officer.- Tribunal's Findings: The Tribunal upheld the valuation of Rs. 1,60,00,000/- determined by the Registered Valuers, stating that it was based on the 'expected super profits' method, an accepted method of accountancy. The A.O.'s rejection of this detailed report was without cogent reasons and contrary to accepted principles of accountancy and settled principles of law. The Tribunal noted that the A.O. failed to refer the valuation issue to the Departmental Valuation Officer even after the case was restored to him.- Court's Conclusion: The Court agreed with the Tribunal, emphasizing that the valuation method used by the Registered Valuers was scientific and accepted. The A.O. had not provided any substitute opinion from a competent officer. The Tribunal's decision to uphold the valuation of Rs. 1,60,00,000/- was deemed appropriate, and the appeal on this ground was dismissed.2. Deletion of Addition Made on Account of Technical Knowhow:The second issue concerns whether the Tribunal was justified in upholding the findings of the CIT(A) in deleting the addition of Rs. 78,65,000/- made on account of technical knowhow.- Background: The assessee received Rs. 79,15,000/- on the transfer of technical knowhow, claimed as a capital receipt. The A.O. initially estimated the expenses incurred on acquiring the technical knowhow at Rs. 1,00,000/-, later reducing it to Rs. 50,000/-, and worked out long-term capital gains at Rs. 78,65,000/-. The CIT(A) deleted this addition, stating that the technical knowhow was generated during day-to-day business operations and no separate payment was made for acquiring it.- Tribunal's Findings: The Tribunal upheld the CIT(A)'s decision, referencing previous Tribunal decisions which held that technical knowhow developed over time without specific acquisition costs could not be liable to capital gains tax. The Tribunal noted that the technical knowhow was not acquired by paying a specific price and was not stock-in-trade of the assessee.- Court's Conclusion: The Court found no error in the Tribunal's reasoning. It agreed that the technical knowhow was a capital asset developed over time, with no specific acquisition cost, and thus, the addition made by the A.O. was rightly deleted. The appeal on this ground was also dismissed.Final Judgment:The Court dismissed the appeal, answering both questions against the revenue and in favor of the assessee. The Tribunal's decisions on both the valuation of goodwill and the deletion of the addition on account of technical knowhow were upheld.